European bank bonds take a beating

IB Corporate Bond Brief: European banking bonds take a beating

The allure of government debt as solace from turbulent risk-waters lost its appeal at the start of what might prove to be a second-tricky week for investors. European banking shares swooned after a regional stress-testing hurdle left onlookers concerned by injuries sustained by those able to jump the hurdle. Fears over the need for an additional round of capital raising among at least 20 banks were fanned by an analyst’s report and helped keep U.S. stocks under pressure. A rally for government bonds ran out of steam as investors became alarmed that declining yields were a sideshow of the worsening European situation. A warning late last week from ratings-giant S&P that the U.S. stood to lose its AAA-status within the approaching 90-days weighed on sentiment reversing an earlier advance for treasury prices.

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INVESTMENT GRADE:

Lloyds Banking Group Plc (LYG) – The capital requirement between the eight European banks that failed the stress tests was a mere €2.5 billion – pommes frites – as the Europeans might say. Yet nagging behind the results was one analyst’s conclusion over the weekend that those who jumped the hurdle this time might have landed awkwardly requiring them to find a further €20 billion between them. That’s not much on an individual basis, but it reopens the old wounds made bare during the financial crisis. The problem was readily reinforced by declines for European banking shares and corporate bonds traded in the U.S. So-called Yankee bonds issued by non-native names were on sale while shares in several of European names were heavily marked down. Lloyds Banking Group saw its share price slide by 8.5% while its Aa3-rated paper maturing in January 2021 presented losses of $1.50 per $1,000 investment lifting the yield to 6.16%. Lloyds’ five-year maturity also suffered a mild loss and between them volume changing hands on the day reached almost $50mm among investors.

Barclays Bank (BCS) - Fellow British banker Barclays also suffered an ugly fate on Monday. Its ADR shares trading in New York sank by more than 8% to $13.30 while investors lined-up to sell around $50mm of its bonds across maturities spanning from 2013 through 2020. Most active among five issues at the start of the week was Barclays 5.125% coupon maturing January 2020, whose price declined by 30 cents per $1,000 face value lifting the yield to 4.96%. That issue rated Aa3 fell by less than its October maturity of the same year, which carries a Baa1-ranking four notches below. Its price shed about $1.00 per $1,000 invested lifting the yield to 6.04%.

Deutsche Bank (DB) – Shares in stalwart German banker Deutsche Bank fell by less than other European lenders, but it’s not often a 4.3% drubbing is something many bankers would be satisfied with. Deutsche Bank couldn’t walk away unscathed from broad-based European selling in a session ignited more fireworks on Wall Street. Deutsche’s Aa3-ranked September 2017 maturing bonds lost 30 cents per $1,000 face value as the yield rose to 3.63%.

Royal Bank of Scotland (RBS) – A 7% share price decline to $10.52 coincided with investors’ sales of around $17mm in bonds issued by the struggling British lender. The government was forced to step in to rescue the banker during the financial crisis a couple of years ago. Today bond sellers forced losses of around 50 cents per $1,000 investment while driving its yield higher to 5.88%.

MUNI-BOND CORNER

The muni-bond calendar will be one of the most active for the year with some $8.27 billion in new issuance expected. States and local governments avoided efforts to balance budgets earlier on in the year shunning the opportunity to issue more debt. With budgets now in place issuance in the second-half of the year is widely expected to start picking up. Thirty-day visible supply has jumped to $11.3 billion and that fact should put some pressure on the secondary market as new money tends to be more attracted towards the new issue market. In the negotiated market NYC will issue $760mm in AA/Aa2rated General Obligation bonds. The retail order period begins Monday while institutional orders are expected to build from Wednesday. In the competitive market Washington state will issue $742mm also in General Obligation bonds. Finally, San Francisco Public Utilities Commission will sell $775mm also rated AA-.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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